Lapse of U.S. flood insurance would invite chaos, Realtors say

July 30--Congress is taking it to the brink as a Tuesday deadline looms to renew the National Flood Insurance Program -- and no deal means pulling the plug in the middle of hurricane season.

Failure to renew would be a matter of no small consequence in Florida, the state with the nation's most NFIP policies at 1.8 million. That includes more than 100,000 in Palm Beach County.

"It's bad timing certainly," Jim Corbin, a broker salesman at Illustrated Properties Wellington, said Sunday about the prospect of Congress failing to act. "A lot of people could be affected."

The latest game of chicken takes its place in a long-running storyline. Even if the U.S. Senate agrees at the last minute to a House plan, it renews the NFIP for only four months. That would mark the seventh short-term extension in less than a year as factions in Congress grapple over potential changes to the program.

"This long series of short-term extensions makes no sense when the issue is so important," said Florida Realtors president Christine Hansen.

For weeks, her group has urged its members to give Congress a message: "No flood insurance, no real estate market. Act now."

Florida is "ground zero" for flood insurance and nearly every Realtor in Florida sells property in or near a flood zone, industry officials say.

Expiration would leave existing NFIP policies in effect, but would make federal flood insurance, the dominant source for decades, unavailable for new buyers. A lack of flood insurance can sink deals when lenders require it to approve financing. Buyers can get cold feet if they learn flood insurance is unavailable or costs a lot more than they were expecting.

Florida has passed legislation in an attempt to clear the way for private insurers to write more flood policies. Lisa Miller, a Tallahassee-based regulatory consultant, says Florida can serve as a "model" to other states. The National Conference of Insurance Legislators took a look at what the state is doing in a meeting earlier this summer.

Still, private coverage serves a growing but small share of the market.

After Hurricane Irma, for example, 934 flood claims were closed with payment from private insurers out of 1,796 filed, according to the state's Office of Insurance Regulation

By comparison, there were 28,588 NFIP claims filed after Irma, with 18,211 closed with payments totalling $964 million, a Federal Emergency Management Agency spokesman said. A little more than $3 million of those payments went to Palm Beach County policyholders as of April.

Not everyone wants the Senate to approve NFIP's short-term renewal. Among the skeptics: Washington, D.C.-based R Street Institute, a policy research organization that says it supports free markets and limited but effective government.

"While expiration of the NFIP would undoubtedly cause some disruption in real estate markets, the R Street Institute urges senators to reject the measure and not to pass any extension that doesn't include at least some reforms," a statement from the group said. Such reforms could include better mapping and mitigation efforts, more encouragement of private insurers and setting tougher conditions on properties that flood repeatedly, officials said.

"The NFIP is unsustainable as currently constructed and Congress cannot continue to ignore its problems," said R.J. Lehmann, R Street's director of finance, insurance and trade policy. "Even after Congress moved last year to erase $16 billion of the agency's debt, it still owes taxpayers roughly $20.5 billion. The Congressional Budget Office projects it will lose an average of $1.4 billion every year."

Political trouble comes when reforms translate into much higher premiums for some property owners, such as rates increasing up to 898 percent in Florida in 2013.

Aaron Greenwood, a military veteran, husband, and father of two, purchased a home in Pinellas County figuring the flood premium was $4,397 a year, but after 2012 Congressional reforms kicked in, it was $43,885.

"I cannot pay the new premium," Greenwood said then. "I cannot sell this home with a flood insurance rate of over $43,000 a year."

Florida had more properties than any other state affected by the sharpest increases, more than 268,000 including more than 4,000 in Palm Beach County.

When "reforms" mean dramatically higher premiums, support tends to get dicey even among supporters of limited government. Florida Gov. Rick Scott said in 2013 "the NFIP rate hike will not only hurt Florida families but will devastate our real estate market."

The result: Congress has felt compelled to go back and soften the impact of such changes, and the cycle of debate begins again.

The NFIP was created in 1968 to serve a difficult market for which private insurers have historically showed little appetite, at least at a price people were willing to pay. Standard homeowner policies do not cover floods.

NFIP policies were designed to cover flooding from the ground up, such as storm surge or heavy rain causing local waterways to overflow. Standard homeowner policies typically cover damage from above, such as wind blowing off a piece of the roof and rain coming in.

Private companies and agents can help sell and administer NFIP policies through a "write your own" program, but the federal government ultimately pays the claims.

The idea was to get property owners to contribute something toward protecting against the risk their properties could be hit by floods. To the extent such catastrophes are not covered by insurance, they leave government with a stark and politically uncomfortable choice: Tell folks tough luck after a disaster and you have should have prepared better for what is now a zone of festering blight, or help people rebuild and restore their communities with government aid.

By last year, there were more than 100,000 NFIP policies in Palm Beach County, including more than 66,000 in unincorporated areas, nearly 15,000 in Boca Raton, more than 9,000 in Boynton Beach and more than 7,000 each in Jupiter, Palm Beach and Delray Beach.

But when premiums go up, it often means fewer people buy it. Hundreds of thousands of Florida homeowners with a choice -- meaning they were not required by lenders to buy it -- dropped flood insurance after Congress increased costs in 2012 in a bid to lower the flood program's debt.

At the same time, Florida officials frequently gripe their state gets a bad deal as a donor market, receiving about 30 cents in claims paid for every premium dollar spent.

No matter how difficult the debate gets, now is no time to cut off access abruptly to the federal flood insurance program, real estate professionals say.